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The Little Known Black Hole in the Pentagon Budget

Ross Marchand on 2018-08-08 10:45:00

This article originally appeared in the American Conservative on August 1, 2018.

The Pentagon is often described as a black hole of government spending. Just how bad is it these days? The Defense Department spent $21 billion in taxpayer money over two years without telling anyone what services were rendered or which companies benefitted.

Normally, watchdog groups can at least identify the agency’s frivolous spending and tease out who the major beneficiaries are. But under something called Other Transaction Authority (OTA), the Pentagon can award money without the usual disclosures or due diligence normally required of federal contracts. Voila! A black hole.

Officials claim that OTA helps the the Department of Defense (DoD) court smaller, non-traditional contractors in places like Silicon Valley by avoiding some of the burdens of a more restrictive competitive bidding process. But loosely written rules and a lack of required congressional communication make OTAs Trojan horses for unaccountable spending that benefits some of the DoD’s most entrenched contractors.

According to a recent report from Federal News Radio, the Pentagon spent $21 billion on 148 OTAs between 2015 and 2017. This number, obtained via the Pentagon’s public affairs office, is at odds with the $4.2 billion logged by the Federal Procurement Data System. So why does the DoD give two different numbers on OTA spending? Because OTAs are not subject to the regulatory and disclosure guidelines required for most contracts, the Pentagon can get away with not reporting them as procurements—in other words, as part of the grand total.

The growth of spending across the federal government has led to the creation of a litany of laws designed to curb procurement waste and abuse. The Competition in Contracting Act (CICA) of 1984, for instance, requires federal agencies to give companies at least 30 days to respond to an agency solicitation (posting) for a task that needs completing. According to the statute, “The contracting officer must promote competition to the maximum extent practicable.” And any deviation must be documented in writing and reviewed. But laws are only as strong as loopholes allow them to be. And even the OTAs that do show up in public records demonstrate a confusing, unruly process where large players dominate.

In February, the Pentagon announced a $950 million no-bid contract to REAN Cloud, LLC for the migration of legacy systems to the cloud. As an Amazon Web Services consulting partner and reseller, REAN Cloud was likely favored due to Amazon’s recent $600 million cloud project for the Central Intelligence Agency. Creating an unusually large contract with little oversight or competition led to ample criticism of the Pentagon, as lawmakers demanded an explanation from DoD. In response to the brouhaha, the Pentagon announced in early March that the maximum value of the contract would be reduced from $950 million to $65 million.

As it turned out, though, even the Pentagon wasn’t exactly sure how to apply the murky requirements of OTA. The Government Accountability Office (GAO) ruled in May that the REAN contract did not accord with federal law, in that REAN was granted an award without even really considering going through a competitive bidding process. “Vague and attenuated” statements from the Pentagon to potential bidders in the beginning of the process ensured that the process would not be an open one. After the cancellation of the REAN deal, the Pentagon finally seems open to competitive bidding for cloud migration.

Unfortunately, OTA is still alive and well across the DoD procurement process. In June, the Defense Information Systems Agency joined the growing list of agencies dabbling in OTA, noting that “many of the companies we’re dealing with are small start-ups.” But as the REAN Cloud case shows, many companies appear “small” but have far larger partners. According to statistics in the Federal News Radio report, “Only $7.4 billion of the nearly $21 billion went to…nontraditional companies.” The problem is created in part by the use of consortiums, which are comprised of multiple companies, which vary in size. The consortium can decide how money is allocated for an award, allowing larger businesses to benefit disproportionately out of sight of the DoD and taxpayers.

Congress has finally started to demand more accountability for OTAs. The 2019 National Defense Authorization Act passed by Congress requires more data reporting and analysis by acquisition officials. But far more work remains.

Lawmakers should set stricter limits on when it’s okay to eschew competitive bidding, and lower the threshold for requiring congressional notification (currently set at $500 million). Allowing tens of billions of dollars to be spent behind the backs of taxpayers without a bidding process cannot continue.